LONDON, Oct 1 (Reuters) - Italy’s shorter-dated bond yields jumped to one-month highs on Monday, pushed up by fears that plans for a significant increase in the country’s budget deficit will spark a clash with the EU and exacerbate already high debt levels.

Those comments followed a report by Italian daily La Repubblica that the European Commission was set to reject Italy’s decision to lift its budget deficit to 2.4 percent of gross domestic product (GDP) in 2019.

The proposed deficit is three times the previous administration’s target. Italian Deputy Prime Minister Luigi Di Maio late on Monday accused EU officials of deliberately upsetting financial markets by making negative comments about Italy’s budget plans.

News late in the day that Economy Minister Giovanni Tria will return to Rome early from meetings in Luxembourg with his EU counterparts to work on the budget plan fuelled the uncertainty, analysts said.

“This afternoon we’ve had some very negative comments from the euro group meeting but there is also uncertainty with Tria coming home and that is part of the story,” said DZ Bank rates strategist Sebastian Fellechner.

Five-year Italian debt insurance costs also hit one-month highs but held below levels seen in late May.

Tria said on Sunday that investments would fuel economic growth over the next two years and debt would be put on a downward path.

Still, Barclays analysts said that unless Italy changed its fiscal stance and/or the European Commission allowed for meaningful fiscal leeway, frictions between Rome and Brussels were likely to escalate.

They said the backdrop of weakening global demand and prospects for a less accommodative monetary policy, meant markets and the European Union would consider it unlikely that Italy’s fiscal measures would be able to raise growth to 1.6 percent in 2019 and 1.7 percent in 2020 as projected.

Barclays believes growth for 2019 will be just 0.9 percent.

The European Central Bank’s monthly asset purchases fall by half in October to 15 billion euros, eroding a key layer of support for Italian bonds.

DOWNGRADE RISK

Commerzbank rates strategist Michael Leister said his bank’s base case was now for a sovereign downgrade from major credit agencies. Moody’s and S&P are expected to review Italy’s ratings later this month.

Italy’s public debt level of 131 percent of GDP, proportionally the highest in the euro zone after Greece, makes its bond market particularly vulnerable to any signs of fiscal slippage.

“We feel ultimately markets will exert pressure back on them (Italy) again as spreads widen and at some point refunding costs become much more expensive,” said Guy Miller, chief market strategist and head of macroeconomics at Zurich Insurance Group.

“Hopefully that will give them a signal they can’t continue doing what they are doing as markets will react.”

Italy’s stock market gave up early gains and was down 0.4 percent in late trade. The euro was a shade weaker .

Outside Italy, euro zone bond yields were 1-2 bps higher, as a last-gasp deal between the United States and Canada on Sunday to salvage the North American Free Trade Agreement (NAFTA) pushed investors to riskier assets.

Reporting by Virginia Furness and Dhara Ranasinghe; additional
reporting by Steve Scherer in Rome and Sujata Rao in London;
editing by John Stonestreet and Peter Graff